National and State Powers Have Shifted over Time

Restraining National Power with Dual Federalism

Historically, dual federalism has meant that states have done most of the fundamental governing. We call this state-centered federalism the “traditional system” because it prevailed for much of American history. Under this system, the national government was quite small and very narrowly specialized in the functions it performed (see Table 3.1).

What do the functions of the national government reveal? First, virtually all of them were aimed at assisting commerce, such as building roads or protecting domestic industries with tariffs on imported goods. Second, virtually none of them directly coerced citizens. The emphasis was on promotion and encouragement—providing land or capital needed for economic development.

State legislatures were also actively involved in economic regulation during the nineteenth century. American capitalism took its form from state property and trespass laws and from state laws and court decisions regarding contracts, markets, credit, banking, incorporation, and insurance. Until the Thirteenth Amendment abolished slavery, property law extended to slavery, with the fugitive slave clause of the Constitution (Article IV, Section 2) requiring even “free states” without slavery to return freedom-seeking enslaved people to the states from which they had escaped.

How the Supreme Court Responded to Demands for a Larger Federal Role

In the first several decades after the Founding, the Supreme Court decided several critical cases that expanded federal powers when there was a conflict between the states and the federal government, removed interstate barriers to trade, and laid the groundwork for a national economy. These early decisions to expand federal power rested on a pro-national interpretation of Article I, Section 8, of the Constitution. That article enumerates the powers of Congress, including the power to tax, raise an army, declare war, establish post offices, and “regulate commerce with foreign nations, and among the several States and with the Indian tribes.” Though its scope initially was unclear, this commerce clause would later form the basis for expanding federal government control over the economy.

The first and most important such case was McCulloch v. Maryland (1819), which involved the question of whether Congress could charter a national bank—an explicit grant of power nowhere to be found in Article I, Section 8.¹⁰ Chief Justice John Marshall answered that this power could be “implied” from other powers expressly delegated to Congress, such as the power to regulate commerce. His decision rested on the necessary and proper clause of Article I, Section 8, which gave Congress the power to enact laws “necessary and proper” for carrying out its delegated powers. Marshall also concluded in McCulloch that any state law conflicting with a federal law is invalid because the Constitution states that “the Laws of the United States . . . shall be the supreme Law of the Land.”

Another major case, Gibbons v. Ogden (1824), reinforced this nationalistic interpretation of the Constitution. The issue was whether New York State could grant a monopoly to Robert Fulton’s steamboat company to operate an exclusive service between New York and New Jersey. In arguing that the state lacked the power to do so, Chief Justice Marshall had to define what Article I, Section 8 meant by “commerce among the several states.” He insisted that the definition was “comprehensive,” extending to “every species of commercial intercourse.” However, this comprehensiveness was limited “to that commerce which concerns more states than one.” Gibbons is important because it established the supremacy of the national government in all matters affecting what later came to be called “interstate commerce.”¹¹

Later in the nineteenth century, though, any effort of the national government to regulate commerce in such areas as fraud, product quality, child labor, or working conditions or hours was declared unconstitutional by the Supreme Court. The Court said that with such legislation the federal government was entering workplaces—local areas—and attempting to regulate goods that had not yet passed into interstate commerce. To enter local workplaces was to exercise police power—a power reserved to the states.

No one questioned the power of the national government to regulate businesses that by their nature crossed state lines, such as railroads, gas pipelines, and waterway transportation. But well into the twentieth century the Supreme Court used the concept of interstate commerce as a barrier against most efforts by Congress to regulate local conditions. Thus, federalism, as interpreted by the Supreme Court for 70 years after the Civil War, enabled business to enjoy the benefits of national policies promoting commerce while being shielded by the courts from policies regulating commerce by protecting consumers and workers.¹²

This barrier fell after 1937, however, when the Supreme Court issued a series of decisions that laid the groundwork for a much stronger federal government. Most significant was the Court’s dramatic expansion of the commerce clause. By throwing out the old distinction between interstate and intrastate commerce, the Court converted the clause from a source of limitations to a source of power for the national government. The Court upheld acts of Congress that protected the rights of employees to organize and engage in collective bargaining, regulated the amount of farmland in cultivation, extended low-interest credit to small businesses and farmers, and restricted the activities of corporations dealing in the stock market.¹³

The Court also upheld many other laws that contributed to the construction of the modern safety net of social programs created in response to the Great Depression. With these rulings, the Court decisively signaled that the era of dual federalism was over. In the future, Congress would have very broad powers to regulate activity in the states.

The New Deal: New Roles for Government

The economic crisis of the Great Depression and the nature of the government response signaled a new era of federalism in the United States. Before this national economic catastrophe, states and localities took responsibility for assisting people in poverty, usually channeling aid through private charity. But the extent of the depression quickly exhausted their capacities. By 1932, 25 percent of the workforce was unemployed, and many people had lost their homes. Elected in 1928, the year before the depression hit, President Herbert Hoover steadfastly maintained that the federal government could do little to alleviate the misery caused by the depression. It was a matter for state and local governments, he said.

When Franklin Delano Roosevelt took office in 1933, he energetically threw the federal government into the fight against the depression through a number of proposals known collectively as the New Deal. He proposed a variety of temporary relief and work programs, most of them to be financed by the federal government but administered by the states. In addition, Roosevelt presided over the creation of several important federal programs designed to provide future economic security for Americans. The New Deal signaled the rise of a more active national government.

Cooperative Federalism and the Use of Categorical Grants

The Roosevelt administration programs typically offered states grants-in-aid, money provided on the condition that it be spent for a particular purpose defined by Congress, such as financial assistance to poor children. Congress added more grant programs after World War II to help states fund activities such as providing school lunches and building highways. Sometimes state or local governments were required to match the national contribution dollar for dollar, but in programs such as the development of the interstate highway system, the congressional grants provided 90 percent of the cost.

These types of federal grants-in-aid are called categorical grants, because the national government determines the purposes, or categories, for which the money can be used. One of the most important—and expensive—was the federal Medicaid program, which provides grants to pay for medical care for people in poverty, disabled people, and many nursing home residents. Over time the value of categorical grants has risen dramatically, increasing from $54.8 billion in 1960 to an estimated $1,111 billion in 2022 (see Figure 3.1).

The growth of categorical grants created a new kind of federalism. If the traditional system of two sovereigns—the federal government and the states—performing highly different functions could be called dual federalism, historians of federalism suggest that the system since the New Deal could be called cooperative federalism. The political scientist Morton Grodzins characterized this as a move from “layer cake federalism” to “marble cake federalism,”¹⁴ in which intergovernmental cooperation and sharing have blurred a once-clear distinguishing line, making it difficult to say where the national government ends and the state and local governments begin (see Figure 3.2).

FIGURE 3.2Dual versus Cooperative Federalism

In layer-cake (dual) federalism, the responsibilities of the national government and state governments are clearly separated. In marble-cake (cooperative) federalism, national policies, state policies, and local policies overlap in many areas.

As important as the states were in this new system of grants, some new federal grants, particularly during the War on Poverty of the 1960s, bypassed the states and instead sent money directly to local governments and even to local nonprofit organizations. One of the reasons for this shift was discriminatory treatment of African Americans in the South. As the civil rights movement gained momentum, the southern defense of segregation on the grounds of states’ rights confirmed the belief in Washington that the states could not be trusted to carry out national purposes.

Regulated Federalism and the Rise of National Standards

Giving policy responsibilities to states raises questions about to what extent and in what areas it is acceptable for states to differ from one another. Supreme Court decisions have provided important answers to many of these questions, typically pushing for greater uniformity across the states. But in other policy areas, the national government has created greater uniformity by offering incentives or imposing rules.

As Congress in the 1970s began to enact legislation in new areas, such as environmental policy, it resorted to another tool: regulations on states and localities, called regulated federalism,¹⁵ in which the national government began to set standards of conduct for the states. As a result, state and local policies in environmental protection, social services, and education are more uniform from coast to coast than are other nationally funded policies.

Sometimes the federal government takes over areas of regulation from state or local governments when their standards are less strict or otherwise inconsistent with federal ones. In the 1970s, such preemption required the states to abide by tougher federal rules in areas including air and water pollution, occupational health and safety, and access for disabled people. The regulated industries often opposed preemptions because they increased the cost of doing business. After 1994, however, when Republicans took control of Congress, the federal government used its preemption power to limit the ability of states to tax and regulate industry.

The Trump administration took actions much like the congressional Republicans of 1994. California has long had more stringent vehicle emissions and mileage targets than the federal government, but the administration moved to prohibit any state from setting standards different from federal ones. In 2019, California and 22 other states sued to keep their ability to set stricter regulations in place.¹⁶ The suit was unsuccessful. In 2022, however, the Biden administration restored the rights of states to set their own emission standards even if these were more strict than federal standards.